How Does a Bank CD Work?

Popularity of Bank CDs

For years the Bank CD has been a popular place for people to put their money. The Certificate of Deposit is a conservative investment that offers a predetermined rate of return over a specific period of time with no risk to the principle.

You can go to any bank and request their CD rates. They will give you a list of interest rates cross referenced with the amount of deposit and the term. In general the more you invest in a Bank CD and the longer you agree to leave it in the bank, the higher the interest rate. Another important element of a Bank CD is the frequency of compounding. This is how often interest is paid. The more frequent interest is paid, the greater the amount of money that earns interest.

You will often see a Bank CD yield listed next to a Bank CD interest rate. The interest rate is the percentage the Bank CD pays. The yield is the amount the Bank CD actually earns. They are different because of interest compounding. Every time interest is paid, the size of the account grows. When interest is calculated again it is on a slightly larger amount resulting in slightly more earned than the interest rate. The more frequent interest is compounded, the higher the yield.

Bank CD interest rates vary from bank to bank and state to state. Some rates may not be available to you depending on where you live. Many smaller banks offer better rates than the big banking companies as a way to build their assets. It pays to shop around when investing in Bank CDs. All Bank CDs are FDIC insured up to $100,000.00 per person per bank.

A Bank CD has a maturity date. If you decide to break your agreement with the bank and withdraw your money before the maturity date you will be penalized. Usually this means you must forfeit some or all of the interest you earned up to that point. Be sure to read all the details of your bank CD agreement before you invest.

When a Bank CD matures, you are paid all the interest owed to you. Sometimes the bank informs you that your CD matured. Sometimes they don't. Either way it is up to you to go to the bank and withdraw your money. Many Bank CDs automatically renew themselves if the owner does not take action within a period of time after maturity. If you miss this grace period you may find your money tied up with a new maturity date. Be sure you understand what will happen to your Bank CD upon maturity and take action within the grace period.